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From The Vault: Why Background IP Clauses Matter

[Occasionally, we like to revisit posts from days gone by that either (1) are always relevant, or (2) are the subject of recent questions received by our office. Lately, we’ve encountered wonky IP language in many of our awards, so today we’ll look at the role that background Intellectual Property clauses hold in agreements.]

Originally published October 17, 2012

In previous posts, we’ve dissected a research agreement and looked at specific slices such as the statement of work and indemnification clauses. Today, we’ll look at background intellectual property (BIP) and its importance in a contract.

By definition, BIP is any intellectual property that a party owns or controls prior to, or outside of, a contractual agreement and that may be necessary to its related efforts. This includes any patents or pending applications, copyrightable materials, as well as other proprietary materials possessed by a party. Additionally, BIP could include any materials for which a party has a valid license from a third party to use for their activities.

The reasons for including a clause regarding BIP in agreements are twofold. First, each party wants to confirm that rights to any BIP used during the project remain vested with their original party, and that any use by the non-owning party during the term of the agreement is limited solely to those activities necessitated by the research. Secondly, the parties wish to spell out terms, however skeletal, for the use of any BIP that becomes a component of any larger IP created during the project.

For example, let’s pretend that Conformco wishes to engage Jonathan Frink, through his appointment at Springfield Heights Institute of Technology, for a sponsored research project. Through the course of the project, Dr. Frink will draw on not only his resources, but those of his institution, to produce the desired results. Included in these is a proprietary flying motorcycle for which Springfield Tech is seeking patent protection. The BIP clause will be important to the institution, as it will reiterate Springfield Tech’s ownership of the flying motorcycle and clearly state that Conformco will have no rights to the motorcycle whatsoever, except as may be needed for Conformco’s personnel to perform their duties under the agreement.

Now, let’s assume that any IP created during the course of the research (Project IP) will be owned solely by Conformco. Next, let’s say that one piece of Project IP partly incorporates Springfield Tech’s proprietary motorcycle, to the point where the Project IP would not be viable without that component. What then?

Absent any terms on point, Conformco would be unable to legally commercialize the Project IP without permission, or a license, from Springfield Tech to the motorcycle. Accordingly, it is important for such situations to be addressed in the related agreement. In many situations, language will be included that states that the owner of any BIP incorporated into Project IP shall negotiate, in good faith, a license for the BIP to the non-owning party under separate agreement, essentially punting on the specifics of the issue until the circumstances warrant.

For Conformco, this would be beneficial as they would have assurance that they will be able to move forward with the Project IP when the time is right. For Springfield Tech, having a potential licensee to the motorcycle already lined up provides peace of mind, and increases the likelihood of a return on their investment in patenting the technology.

Recently, we have noticed an increase in sponsors requesting specific terms to a license to BIP right at the outset, including royalty splits, territories and the like, without even knowing if any Project IP will arise. To some degree, this is understandable, as they are nervous about hashing out yet another agreement in several years’ time. However, from the institution’s perspective, this is rarely a viable option. For one, no one knows what the Project IP market will be like at the time of commercialization, so terms that may be favorable now may turn out to be onerous or not commensurate with the value of the BIP. Additionally, while parties can generally identify potential BIP prior to the inception of the contract, there are instances where BIP not previously contemplated ends up being utilized. As a result, an institution may be limited in their use of this ‘extra’ BIP because of this pre-existing license granted to the sponsor.

Consequently, it is important for ORAs to communicate with their PIs and departments to determine the scope of any BIP that may be used during a particular project. And, if necessary, the institution’s Tech Transfer office should be brought in as early as possible to provide advice with respect to any associated licenses provided under the contract.